Job Market Paper
Treasury Bills Supply and Liquidity Premia in Segmented Money Markets
Abstract: This article investigates how the relationship between the supply of Treasury bills and the yields on money markets assets has evolved since the financial crisis. I document two lasting singularities since 2009: (i) the liquidity premium on T-bills is now higher than the one on reserves, (ii) the supply of T-bills has become a strong predictor of the liquidity premia on both overnight repo transactions and T-bills. I rationalize these facts in an asset pricing model with heterogeneous financial institutions differing in their access to central bank reserves. I find that the combination of the large amounts of excess reserves (following QE) and a more stringent regulatory regime (following Dodd-Frank Act and Basel III) created a segmentation of money markets according to which traditional banks do not intermediate liquidity to shadow banks. As a consequence of this segmentation, the Fed became passive to exogenous changes in the supply of T-bills; thereby leaving the liquidity premia on money market instruments free to react to supply shocks.
(joint with Adrien d’Avernas and Matthieu Darracq Pariès)
This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring heterogeneous banks subject to funding risk. When banks are well-capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle between declining asset prices and funding risks arises. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector but fails to reach the shadow banking sector. When the latter sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities.
This article was awarded the 2018 Distinguished CESifo Affiliate Award in Macro, Money and International Finance.
When Short Drives Long: Endogenous Risk, Innovation, and Hysteresis
(joint with Adrien d’Avernas, draft available on request)
We propose a transmission mechanism from financial cycles to aggregate productivity growth. We provide a structural macroeconomic model with heterogeneous risk aversion and endogenous productivity growth in which the financial sector is key in screening and absorbing innovation risk. Shocks to innovation levels and volatility generate financial cycles. During financial stresses, the financial sector becomes undercapitalized and reduces its exposure to innovation risk. As a consequence, the willingness to take risks in the economy is reduced, and less innovation occurs. Using a large database on the U.S. financial sector from 1973 to 2014, we show that the combination of undercapitalization and heightened uncertainty generate large time-varying risk premia, safe asset shortage, and hysteresis in productivity growth following financial crises that are quantitatively consistent with empirical observations. We derive macro-prudential policy implications of the arising trade-off between short-run growth and financial stability.
(joint with Adrien d’Avernas)
We propose a robust method for solving a wide class of continuous-time dynamic general equilibrium models. We rely on a finite-difference scheme to solve systems of partial differential equations with several endogenous state variables. This class of models includes the frameworks (among others) of He and Krishnamurthy (2013); Silva (2015); Brunnermeier and Sannikov (2014); and Di Tella (2016).